Taxing Results From Jackson Hewitt

It has been more than a year since a Jackson Hewitt (NYSE: JTX  ) franchisee was found to be filing fraudulent tax forms, but it appears that investors are hewing to one of Warren Buffett's most notorious quotes and ruthlessly punishing Jackson for losing even a shred of its reputation.

Back in the third quarter, management surmised that negative press related to the euphemistically labeled "Department of Justice matter" involving a former franchisee was hurting traffic. It has since turned to focusing on the fact that people are filing tax returns later each year, speaking to the need to devise more compelling preseason products and a better marketing message.

In truth, management can't pinpoint the exact reasons for its anemic sales and plummeting earnings. The near-term trends are sobering. After many years of steady, double-digit growth in the business, 2008 sales fell 4.6% as Jackson prepared 5.3% fewer tax returns for the year. Earnings were nearly cut in half to $1.09 per diluted share, and even fell below the figures Jackson Hewitt cited when it warned of the poor results late last month.

Earnings would have been quite a bit higher, if not for costs and litigation charges related to investigating the franchisee, but it's difficult to tell what the recovery trends will be, since management didn't offer any guidance for the coming year, as it usually does. It also didn't provide a cash flow statement in the earnings release, although it did maintain its quarterly dividend payment of $0.18, which works out to a decent annual dividend yield of more than 5%.

I was initially drawn to Jackson Hewitt because of its appealing business model, stemming from a service-based, franchise model that lends itself to generous cash generation and low levels of capital expenditure. Of course, I also liked the growing sales and profits, which have quickly reversed course. Still, Jackson remained firmly profitable for the year and posted an 11.6% net margin on what I and other shareholders hope will turn out to be depressed results.

But as it stands currently, uncertainty is running high at Jackson Hewitt, and archrival H&R Block (NYSE: HRB  ) is seeing stabler trends in its business after its own rough stretch. Online rival Intuit (Nasdaq: INTU  ) also looks much better positioned these days. Let's hope management truly does understand the issues facing Jackson Hewitt right now.

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Jackson Hewitt is a Motley Fool Hidden Gems Pay Dirt and Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Ryan Fuhrmann is long shares of Jackson Hewitt, but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned. The Fool has an ironclad disclosure policy.


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